2025 Q1 Newsletter

IRS Proposes Regulations on Mandatory Automatic Enrollment

The IRS issued Proposed Treasury Regulation 1.414A-1 on January 14, 2025, in support of SECURE Act 2.0’s mandate to include eligible automatic contribution arrangements (EACAs) in newly established 401(k) and 403(b) plans, effective for plan years after December 31, 2024. The proposed regulations also address other provisions of SECURE Act 2.0 as they relate to the auto enroll mandate, including

• Eliminating unnecessary plan notices to unenrolled participants,

• Optional pension-linked emergency savings accounts (PLESAs) for nonhighly compensated employees (nonHCEs), and

• Consolidated defined contribution (DC) notices.

There is a 60-day public comment period until March 17, 2025, on the proposed rules, followed by a public hearing scheduled for April 8, 2025. The rules will not apply until six months after official publication of the final rules. For earlier plan years, a plan can apply a reasonable, good faith interpretation of the statutory provision.

Automatic enrollment mandate

The proposed regulations mandate that new 401(k) and 403(b) plans must automatically enroll eligible employees at a minimum contribution rate of 3%, increasing by 1% annually until reaching at least 10% but not exceeding 15% under an eligible automatic contribution arrangement (EACA). Employees must be able to opt out or modify their contribution percentage. Additionally, plans must allow withdrawals without penalties within 90 days of automatic enrollment.

Plans exempt from the mandate include those established before December 29, 2022 (i.e., pre-enactment plans), government and church plans, small plans with 10 or fewer employees, or businesses in operation for less than three years. Notice 2024-02 provided some guidance on implementation.

Key Takeaways from the Proposed Regulations

• The automatic enrollment requirements apply to all eligible employees, including long-term, part-time employees, without exception.

• Investment allocations for contributions under EACAs must comply with the Department of Labor’s (DOL’s) qualified default investment alternative (QDIA) rules.

• Mergers, acquisitions, and spin-off situations may affect the exempt status of a plan; timely completed acquisitions and mergers (within the "transition period") can help plans retain their pre-enactment status.

• For multiple employer plans (MEPs) and pooled employer plans (PEPs), whether a plan is exempt from the EACA requirement is determined on an employer-by-employer basis.

• Amendments to existing plans, including changes in service providers or eligibility expansions, do not alter their pre-enactment (i.e., exempt) status unless they involve the adoption of a MEP or a merger with a non-pre-enactment plan.

• For unenrolled participants, no additional disclosures, notices, or plan documents are required to be furnished, provided that these participants receive an annual reminder notice.

• Automatic contributions to a pension linked emergency savings account (PLESA) cannot be used to satisfy the automatic enrollment requirements under IRC § 414A.

• The EACA notice can be combined with other required notices such as for QDIAs, automatic contribution arrangements, safe harbor status and a qualified automatic contribution arrangement (QACA) as long as the combined notice

  • Includes all required content for each individual notice,

  • The issues addressed in the combined notice are clearly identified,

  • Is furnished at the time and with the frequency required for each individual notice,

  • Is presented in a manner that is reasonably calculated to be understood by the average plan participant, and

  • Is not obscure or fail highlight key information.

Conclusion

The automatic enrollment mandate for new 401(k) and 403(b) plans is effective for 2025 and later years. Notice 2024-02 provided some guidance on implementation. Although we have proposed regulations at this point, they will not apply until after they are published in their final form in the Federal Register.

Plan Sponsors Can Self-Correct Some Errors Under the VFCP

The DOL released new rules that add a self-correction process to the VFCP, effective March 17, 2025. Specifically, the new procedures permit a plan sponsor to self-correct two of the most common plan errors related to 1) delinquent participant contributions and loan repayments, and 2) eligible inadvertent participant loan failures. Like the traditional VFCP correction, to be eligible to use the self-correction program, neither the plan nor the plan sponsor can be under investigation by the DOL.

Delinquent Contribution Correction

The DOL considers participant contributions and loan repayments as delinquent when employers retain these payments without contribution to the plan beyond the time permitted by the DOL, in general, as soon as they can be segregated from the employer’s general assets. Under the new program, plan sponsors can self-correct this error if the following occurs:

• The plan sponsor calculates the lost earnings on the delinquent payments, using the DOL’s online calculator, from the date the amount was withheld to the date it is deposited into the participant’s account;

• The lost earnings owed on the late deposits is $1,000 or less;

• The delinquent payments and earnings are deposited within 180 days from the date of withholding from the participant’s paychecks or the date of receipt by the employer;

• The plan sponsor pays all penalties, late fees and other charges; and

• The plan sponsor files the self-correction component notice (SCC Notice) which provides the name, email address and tax identification number of the plan sponsor; the plan name and three digit number; the number of participants affected; and a description of the failure, including, but not limited to, the date the failure occurred, the date the failure was corrected and the amount of lost earnings.

If a plan sponsor corrects under the self-correction program, it must notify the EBSA of the self-correction by submitting a SCC Notice with the required information through the EBSA’s website. The plan sponsor must also keep all documents relating to the correction, including the SCC Retention Record Checklist and a penalty of perjury statement, in the plan’s records. Unlike a correction under the VFCP, a plan sponsor will not receive a “no action” letter. Instead, the plan sponsor will simply receive an email acknowledgment. The late contributions will still need to be disclosed on Form 5500.

Inadvertent Plan Loan Failure

Following the directive set forth in SECURE Act 2.0, the self-correction process also permits the correction for inadvertent plan loan failures that are eligible for correction under the IRS’ Employee Plans Compliance Resolution System (EPCRS).

Inadvertent plan loan failures include:

• Non-compliance with IRS rules regarding the amount, duration, or level of amortization of the loan;

• Loans that default due to a failure to withhold from a participant’s wages;

• Failure to obtain spousal consent for a loan; or

• Allowing a loan that exceeds the number of loans permitted under the plan.

Like the correction for delinquent contributions, plan sponsors must notify EBSA of the self-correction by submitting the SCC Notice and complete and retain the relevant documents and penalty of perjury statement. However, the SCC Retention Record Checklist is not required for the correction of this failure.

PTE 2002-51

In addition to the changes to the VFCP, the DOL has amended Prohibited Transaction Exemption (PTE) 2002-51, which provides relief from certain excise tax provisions of the Internal Revenue Code, as long as all of the requirements of the VFCP and exemptions are met, to provide excise tax relief for these self-corrected failures as long an SCC acknowledgment email is received. The amendment also removed the requirement that prevented an applicant from receiving excise tax relief if it had been granted such relief in the previous three years.

Conclusion

The self-correction process to the VFCP is a welcome addition for plan sponsors and will make it easier for plan sponsors to correct the most common errors and seek excise tax relief.

DOL Makes Inflation Adjustments to Plan Penalty Amounts

The Department of Labor (DOL) has issued final regulations that adjust for inflation the agency's 2025 civil money penalties. These penalty amounts, which help ensure that retirement plans meet their disclosure, reporting, and recordkeeping obligations, become effective for any penalties assessed after January 15, 2025. Increased penalties of note follow.

• Failure to File Form 5500: The penalty increases from $2,670 to $2,739 per day for each day that a required annual report remains unfiled.

• Failure to Provide DOL-Requested Documents: The penalty rises from $190 to $195 per day (with a maximum of $1,956 per request).

• Failure to Provide Plan Documents to Participants/Beneficiaries: The penalty remains $110 per day if plan documents are not provided within 30 days of request.

• Failure to Furnish Required Benefit Statements/Maintain Records for Former Participants: The penalty increases from $37 to $38 per employee for each instance of noncompliance.

DOL Temporary “Non-Enforcement Policy” for Small-Balance Transfers to State Unclaimed Property Funds

On January 14, 2024, the Department of Labor (DOL) published a Field Assistance Bulletin (FAB) 2025-01 announcing a “non-enforcement” policy with respect to the transfer of small defined contribution (DC) plan balances ($1,000 or less) belonging to missing participants to a state unclaimed property fund.

Background

In 2021, the DOL published Field Assistance Bulletin 2021-01and best practices guidance related to missing participants. Plan sponsors, on occasion, must deal with missing plan participants and beneficiaries, and what to do with their plan balances. Current DOL regulations provide a rollover to an IRA as a fiduciary safe harbor for distributions over $1,000 from terminated or abandoned DC plans for missing participants. Under FAB 2021-01, plans also may transfer the balances of missing or nonresponsive participants or beneficiaries to the Pension Benefit Guaranty Corporation’s (PBGC’s) Defined Contribution Missing Participants Program rather than to an IRA, certain bank accounts, or to a state unclaimed property fund. For amounts of $1,000 or less, FAB 2025-01addresses plan transfers to a state unclaimed property fund.

FAB 2025-01

For transfers of small benefits of $1,000 or less to a state unclaimed property fund, the DOL will not pursue violations under ERISA provided a plan sponsor follows the guidelines of FAB 2025-01.

To take advantage of FAB 2025-01 the plan fiduciary must

• Determine that transfer to a state unclaimed property fund is prudent.

• Have implemented a prudent program to find missing participants consistent with DOL’s Best Practices.

• Transfer the missing individual’s balance to the state fund based on their last known address.

• Ensure the plan’s SPD explains the transfer program and possibility of this sort of transfer, and provides a plan contact for further information.

• Determine the state fund qualifies as an “eligible state fund.”

Eligible state fund

To be an eligible state fund, the fund must meet the nine criteria detailed below. A plan fiduciary may rely on a representation by a State Treasurer that the state operates an unclaimed property fund that meets all of the following conditions.

To be an eligible state fund, the fund must

• Act as the custodian of the funds of affected participants, their beneficiaries, and their heirs and allow for claims for unclaimed property in perpetuity.

• Not charge any fees against (or otherwise reduce) the transferred amount.

• Maintain at no charge a searchable website showing participant and plan identification information and that permits an electronic claims process.

• Publicly provide the ability to make inquiries by physical mail, electronic mail and telephone.

• Participate in the National Association of Unclaimed Property Administrators MissingMoney.com website or similar website operated under the auspices of the National Association of State Treasurers, Inc.

• Provide streamlined processing for small claims.

• Diligently search, annually, for an updated address for amounts over $50, and, when an updated address is obtained, notify the owner.

• Permit a plan to pre-pay a re-appearing participant directly and then get reimbursement from the state fund.

• Participate in the States’ Unclaimed Property Clearing House of the National Association of State Treasurers, Inc.

Takeaways for sponsors

From a plan governance perspective, plan sponsors should have a documented policy in place they follow that addresses missing participants and their plan balances that aligns with the DOL’s best practices and FABs on the subject. Regarding FAB 2025-01, to take advantage of this non-enforcement policy, the plan sponsor (or acting fiduciary) must implement a missing participant program consistent with DOL’s Best Practices for Pension Plans.

IRS Publishes Proposed Regulations on SECURE 2.0 Catch-Up Contribution Rules

On January 13, 2025, the IRS published proposed regulations on two SECURE Act 2.0 changes to 401(k) catch-up contribution rules: 1) increasing the catch-up contribution limit for taxpayers aged 60, 61, 62, or 63 (effective 2025) and 2) requiring Roth treatment of catch-up contributions made by taxpayers who, for the preceding calendar year, receive more than $145,000 in wages from the employer sponsoring the plan (effective 2026).

Proposed Regulations on Universal Availability

The Tax Code nondiscrimination rules generally provide that a plan that offers catch-up contributions must offer them to all catch-up eligible participants in the same dollar amount (the “universal availability” requirement). The proposal would provide an exception to this rule for the increased catch-up amount available to participants aged 60-63.

Proposed Regulations on Mandatory Roth Catch-Up Contributions

• The proposal would amend the regulations to permit a plan to provide that participants subject to the Roth catch-up requirement are deemed to have irrevocably designated any catch-up contributions as designated Roth contributions where necessary to comply with the new rule. Availability of this treatment would be conditioned on the participant having “an effective opportunity … to make a new election that is different than the deemed election.”

• The proposal would clarify that a participant who did not have FICA wages in the previous taxable year (for example, a partner who had only self-employment income) would not be subject to the Roth catch-up requirement and that the $145,000 threshold need not be pro-rated for a participant who only worked for part of the prior year (e.g., a new hire).

• Under the “universal availability” requirement (noted above), if Roth catch-up contributions are allowed for participants above the $145,000 threshold, then the plan is required to “allow all other catch-up eligible participants (e.g., those below the $145,000 threshold) to also make catch-up contributions as designated Roth contributions for the plan year.”

• A plan is not required to include a designated Roth contribution program. Under these plans, an otherwise catch-up contribution eligible participant whose previous tax year FICA wages exceeded $145,000 could not make catch-up contributions. Participants whose previous tax year FICA wages did not exceed $145,000, however, could be allowed to make catch-up contributions, without violating the “universal availability” rule.

• More generally, under the proposal, a plan would not violate the universal availability requirement merely because it permits each catch-up eligible participant to make elective deferrals up to the maximum dollar amount permitted under applicable law.

• While, generally, determining whether a contribution is a catch-up contribution (and thus, for participants over the $145,000 threshold, would have to be made on a Roth basis) would be made at the time the contribution is made (e.g., after the participant has made the “regular” 402(g) maximum contributions), the proposal would allow flexibility as to timing, (e.g., allowing a catch-up eligible participant to make “elective deferrals as designated Roth contributions during the … year equal to the applicable dollar catch-up limit.)

• The proposal takes a narrow approach to determining the wages considered in applying the $145,000 threshold: Only FICA wages paid by the employer sponsoring the plan are considered.

• The proposal provides several alternative approaches to “correcting” contributions that went into the plan on a pre-tax basis in violation of the catch-up Rothification rule.

These changes to the catch-up contribution rules will not be applicable until after final regulations are issued. A public hearing has been scheduled for April 7, 2025.

Trump Administration to Scrutinize Regulations and Regulatory Process

Three successive pronouncements from the Trump administration demonstrate its drive to reign in unnecessary regulations, including those that affect retirement plans. First, on January 20, 2025, a memorandum from President Trump directed a regulatory freeze (for 60 days), halting the implementation of any new or pending regulations.

Second, on January 31, 2025, President Trump issued an executive order launching a “Massive 10-to-1 Deregulation Initiative” that directs federal agencies to conduct comprehensive reviews of their existing regulations, with the goal of eliminating or revising rules that are deemed unnecessary, redundant, or overly burdensome. For every new regulation proposed, at least 10 outdated or inefficient rules must be removed or reformed. The accompanying fact sheet outlines detailed procedures for implementation.

Third, an executive order fact sheet, “End Federal Overreach in Regulation and Enforcement,”issued February 19, 2025, outlines a sweeping initiative to rein in regulatory activities by requiring agency leaders to conduct comprehensive reviews of all rules under their jurisdiction. It mandates that agency heads, in close coordination with their DOGE team leaders and the Office of Management and Budget (OMB), scrutinize each regulation for its legal basis and consistency with the current administration’s policy. Agencies must assess whether their current regulations exceed the statutory authority granted by Congress and determine if any rules conflict with constitutional principles. To provide structure and clarity in this overhaul, the fact sheet indicates that the administration will develop a “Unified Agenda.” This agenda will serve as a centralized roadmap to catalog and target regulations for repeal or modification.

Bipartisan Bill Would Allow CITs in 403(b) Plans

On February 5, 2025, Rep. Frank Lucas (R-OK-3) re-introduced H.R. 1013 to the House of Representatives. The House Committee on Financial Services is now reviewing the bill.

1. Expanded Investment Options

The bill broadens the types of assets in which CITs can invest, thereby providing retirement plans—especially those governed under 403(b) rules—with access to a wider range of investment strategies. This change is intended to enhance portfolio diversification and potentially improve returns for plan participants.

2. Clarified Regulatory Framework

Provisions in the bill clarify the roles and responsibilities of fiduciaries with respect to CITs. It outlines more precise disclosure and oversight requirements to ensure that participants receive transparent information about fees, performance, and any conflicts of interest associated with CIT investments.

3. Streamlined Administration

The legislation includes measures designed to simplify the administrative processes related to CITs. By reducing regulatory ambiguities, it aims to lower administrative burdens on plan sponsors and fiduciaries, making it easier to manage CIT investments while maintaining robust participant protections.

4. Enhanced Investor Protections

With updated oversight provisions, the bill seeks to ensure that CITs adhere to higher standards of prudence and accountability. This includes improved mechanisms for monitoring performance and costs, which are intended to better safeguard the retirement savings of plan participants. These provisions collectively work to modernize the use of CITs in retirement plans by increasing flexibility for investment choices, clarifying fiduciary responsibilities, and enhancing transparency and oversight.